The Rise of VAT in Africa – Impact and Challenges - empcom.gov.in

grammes developed in Africa: designing an appropriate
tax regime for small and micro businesses is a necessary
step towards facilitating the modernization of the VAT
system and the adoption of a high registration threshold.
The comparative study of the tax systems for small businesses
shows a great diversity of the existing regimes,
including: turnover taxes, patents, systems based on
physical indicators, taxes based on the business’ rental
value, etc. 6 Discussion and the exchange of views on this
topic are relatively new. The discussions during the ITD
conference confirm that there is not yet a credible guide
to best practices. While an in-depth evaluation of the
existing regimes is needed, those recently developed in
some countries should be given particular attention, for
example, the tax regime for small businesses that was
introduced in Madagascar in 2008. 7
4. Reform of Tax Administration – Progress and
Challenges
4.1. Impact of VAT on tax administration
VAT is certainly the most important tax reform that has
taken place in Africa in the past 20 years and it is not surprising
that its introduction has resulted in significant
changes for most tax administrations in this region. The
experts who question the appropriateness of VAT for
developing countries sometimes claim that similar
changes could have been made under the previous tax
systems, including the old turnover taxes. To a large
extent, these views reflect a lack of experience with the
actual situation of the tax and customs administrations
in Africa.
The collection procedures for income tax that were in
place prior to the introduction of VAT were primarily
based on negotiations between tax officers and taxpayers.
8 These procedures were particularly ineffective and
time consuming. They also provided significant opportunities
for corruption. Similarly, the old turnover taxes
were particularly complex and difficult to administer. In
several countries, they were supplemented by specific
excise taxes on numerous items (sometimes more than
20, such as gold, tea, sugar, cement, soap, etc). The administration
of these taxes was commonly based on physical
controls similar to those used by the customs administration.
These controls provided opportunities for multiple
visits to the taxpayer’s premises, which were frequently
accompanied by harassment and corruption. All
tax administration specialists who have provided technical
assistance in African countries before the introduction
of VAT can confirm that it was impossible to
develop a sound tax administration modernization
strategy in such a context.
Modernization of the tax administration has often
started with developing more effective and transparent
collection methods for VAT. It has also frequently
involved a fundamental change in the organizational
structure of the tax administration, especially integration
of functions that were previously fragmented
among several agencies. Another component of the
Articles
modernization, which has also been significantly influenced
by the “structuring effect” of VAT, is the development
of the concept of “segmentation” of taxpayers. This
concept takes into account the characteristics of the various
categories of taxpayers, in order to adapt the compliance
programmes and the network of local offices to
the need of the taxpayers for specific services, and to the
different types of risks of non-compliance (see below). 9
When and how have these reforms started in Africa? In
several countries, substantial procedural and organizational
reforms were initiated during the preparatory
stage of the introduction of VAT. This was, for example,
the case regarding the transfer of the collection function
from the Treasury to the tax administration and the
establishment of the first large-taxpayers offices to facilitate
the introduction of VAT in francophone Africa (for
example, in Benin in 1990 and in Togo in 199 ). To some
extent, the creation of semi-autonomous revenue agencies
(the “revenue authorities”) in anglophone Africa in
the 1990s was also part of the plans that were developed
for the introduction of VAT (for example in Tanzania,
Uganda and Zambia).
Moreover, significant steps, such as the development of
taxpayer identification number systems, new filing and
payment methods, and new education and information
programmes, were also developed in several countries
during the preparations for the introduction of VAT, on
the basis of the available guides of best practices. 0 However,
in most African countries, including those where
preliminary steps had been taken prior to the introduction
of VAT or as part of the preparatory process, the
most fundamental reforms of the tax administration
were made after this introduction.
4.2. Modernization of the method of taxation
VAT is basically a self-assessed, account-based tax. Its
introduction has led to significant changes in the
method of taxation. The filing and payment regimes that
6. Bodin and Koukpaizan (note 12), and Marquez, Bareix and Villela, Recommendations
and Best Practices on Taxation of SMEs in Latin America, (Inter-
American Development Bank, 200 ).
7. This regime was developed for small and micro businesses with a
turnover below the VAT registration threshold (approximately USD 100,000).
Small businesses, which are defined as those with a turnover between USD
10,000 and the VAT threshold, are subject to a simplified (cash flow) income
tax. Micro businesses, which are defined as those with a turnover below USD
10,000, are subject to a presumptive tax based on the turnover. A similar
regime was also developed in Egypt in 2006, but it is unclear if a firm decision
has been made to launch it.
8. In anglophone Africa, these procedures were based on “administrative
assessment.” They provided for the verification of all returns prior to finalization
of the assessment and payment of the income tax due (often several years
after the return had been submitted). A similar concept (enrôlement) was also
used in several francophone countries, where the taxation process was further
complicated by the fragmentation of the assessment and collection functions
between two directorates reporting separately to the Minister of Finance.
9. Taxpayer segmentation is an application of a basic marketing concept
(market segmentation) to identify the unique characteristics of different
groups of clients and design a marketing strategy that is based on these characteristics.
Theoretically, this concept could have been developed from a
review of income tax data. However, these data were particularly poor and
inaccurate in most African countries.
0. In particular, VAT: Administrative and Policy Issues (IMF, 1991).
© IBFD INTERNATIONAL VAT MONITOR MAY/JUNE 2009
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